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Rudi Bester is a businessman, serial entrepreneur, equities trader and value investor. His investment preferences include identifying undervalued large cap stocks to hold longer term. Higher risk/growth, small-cap stocks round out his personal investment portfolio. He also assists and counsels... More
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  • Should Retirees Buy Stocks (Part 2)

    First read "Should #Retirees Buy Stocks (part 1)".

    Retirees typically invest in low returning investment choices based on the advice of their financial planner, or simply because they may perceive bonds and guaranteed/certified deposit accounts as more safe and secure.

    They often invest in these investment vehicles while unfortunately watching the value of their investment portfolios decline faster than their life expectancy. The question begs… where will seniors be able to derive more income from their investments, while at the same time, mitigate the risk of investment losses?

    I suppose, if the question were "should I buy stocks", the underlying question becomes "how do I choose a stock to invest in?"

    For the purposes of this summary, I've elected to use Travelers ($TRV) as an example of a Dow stock that may be suitable for inclusion in a retiree's portfolio.

    At a high level, and without getting overly technical, retirees can consider these 5 factors when deciding whether to invest:

    1. Size: Ideally, there is safety in relative size and retirees should not be taking chances with new or unproven businesses. TRV is a Dow-Index listed company with a 150-year history as a leading U.S. insurance corporation. The corporation has a market value (or capitalization) of about $31.6 billion, and employs more than 30,000 employees. While large companies may not grow as fast as small companies, large companies offer far greater security than new 'upstarts'.
    2. Dividends: Retirees would generally want to earn income via dividends. In addition to healthy payouts now, they should also look for dividend growth over time. TRV offers a current dividend yield of 2.2% (vs. an industry average of 1.23%), a 5-year dividend growth of nearly 10% and 8 consecutive years of dividend increases. Not the greatest, but very good.
    3. Valuation: For publicly traded corporations, we typically look for a 'normalized' Price/Earnings ratio (P/E = the share price divided by the earnings per share) of <18. On March 22, 2013 TRV's P/E was 13.32
    4. Stock Stability: This may be a little too technical, but it's worth sharing anyway for those who are interested. To measure stability, we determine beta, defined as the measure of the risk or volatility of TRV vs. the market as a whole. Financial advisors may be looking for a beta of less than 1. A beta of 1 indicates that the security's price will move with the market. Less than 1 means that the security will be less volatile than the market. And greater than 1 indicates that the security's price will be more volatile than the market. For example, if a stock's beta is 1.2, it's theoretically 20% more volatile than the market. Currently, TRV offers a beta = 0.67, meaning that TRV is less volatile than the market as a whole. In addition, investors don't like stocks that have experienced losses of greater then e.g. 20% at any time, during the past five years. TRV lost 5.9% in 2008/9 when the stock market 'crashed', faring far better than most other companies.
    5. Consistency: Here we should look at revenue growth - after all, we don't want to invest in a declining company - and specifically at the revenue growth over a period, e.g. 5 years. TRV has generated positive revenue growth for the last 4, and this is acceptable. Another way to analyze consistency would be to explore TRV's free cash flow growth, once again looking for positive growth over a period of e.g. 5 years. TRV has only managed growth in free cash flow for 2 of the past five years, but as an insurance company, TRV took some heavy body blows as a result of natural disasters, like hurricanes Irene and Sandy. Not the greatest in generating free cash flow growth, but respectable. Losses were more as a result of uncontrollable business events caused by natural disasters (the large insurance payouts), than poor management decisions.

    An analysis like the one above is meant to provide highlights of company performance to assist small investors with investment decisions. Your financial advisor would obviously be more in tune with your unique, personal financial situation and investment return requirements.

    As I write this article, the Dow has returned just more than 10% YTD (March 22, 2013). This performance is slightly better than the historical performance, generating around 7% annually, for the past 100 years.

    If you - as a retiree - have most of your wealth invested in a portfolio of relatively poor performing, 'low risk' investment vehicles, speak to your wealth manager to discuss your investment returns achieved. Ensure that you are not invested in a real declining asset portfolio, especially when adjusted for annual inflation!

    Aug 21 9:53 AM | Link | Comment!
  • M&A: Delivering Shareholder Wealth?

    Mergers and acquisitions (M&A) represent a core component and popular corporate strategy, based on the level of M&A activity in the marketplace.

    Corporate Strategy - as a topic - is a core subject for graduate business students, and includes corporate finance and management. M&A - as a business strategy - concentrates on the buying, selling, dividing and combining of different companies and similar entities.

    The primary purpose of adopting an M&A business strategy in a for-profit business environment seems to help an enterprise grow rapidly in its sector, or location of origin, or a new field or new location. Ideally, this is achieved without having to create a subsidiary, other child entity, or perhaps via a joint venture.

    An acquisition (or takeover) can be defined as the purchase of a business by another business entity. A purchase can further be defined by considering that 100% (or nearly 100%) of all the assets or ownership equity of the acquired entity had been taken over by the acquirer.

    Acquisitions can also be divided into private and public acquisitions. This simply depends on whether the acquirer is listed on a public stock exchange, or not. Additional dimensions exit, for example whether an acquisition may be considered friendly or hostile.

    A merger (or consolidation of two or more businesses) can be defined as two companies combining together, to form a new enterprise altogether. Most frequently, neither of the companies - pre-merger - would remain, nor exist independently afterwards.

    Achieving success when adopting an M&A strategy has seemingly proven to be very difficult, according to some practitioners, consultants and academics. The success, or failure, of M&A as a corporate strategy is explored in detail in my research paper entitled M&A (As a Corporate Strategy for Delivering Shareholder Value), which is available on your Amazon Kindle for only $0.99.

    The actual measurement or metrics - by which M&A success or failure should be determined - also forms part of the core purpose of the research shared.

    Various studies have shown that 50% of acquisitions were unsuccessful, and many more suggest failure rates much greater than that. An acquisition process is very complex, and there are many variables and different business dimensions that can influence the outcome.

    It seems that serial acquirers appear to be more successful with M&A than companies who only make an acquisition occasionally. But to this end, growth as a goal or objective is often measured exclusively in financial terms.

    Shareholder wealth, or growth in shareholder value, or enterprise value achieved as a result of successful corporate strategy are frequently assessed using relatively simple financial metrics, like an increase in the stock price of a publicly traded company, or a leap in earnings per share (NYSEARCA:EPS), and so on.

    Drawing a distinction between mergers and acquisitions has become increasingly blurred in recent times. This blurring is most obvious when success is measured in terms of the ultimate economic outcome.

    My research paper includes real-life examples like the Facebook (FB) acquisition of Instagram, along with examples that include SASOL & Talisman (TLM); CNN & Mashable; Manulife Financial (MFC) acquiring John Hancock and UPS attempting to acquire TNT Express (TNTE).

    I trust that you will enjoy reading my research paper, as much as I had enjoyed researching M&A, and the practitioners' quest to deliver shareholder wealth.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Aug 15 1:01 AM | Link | Comment!
  • What Is A Trailing Stop?

    A trailing stop is an order entered with a stop parameter that creates a trailing or moving activation price.

    What does that mean?

    Example # 1: Let's say you bought a company's stock for $10 and that stock is currently trading at $15/share. If you had entered e.g. a 3% trailing stop sell order, and the stock were to fall in value by 3% or more from its new high at $15/share (about $0.50), the trailing stop order will help prevent you from losing too much of your posted gain.

    In a bull market (when stocks are going up)... you effectively will not lose money using this methodology, although it is possible that you may have been able to achieve a greater gain without the trailing stop order executing (commonly aka greed)!

    When the bears pounce (when stocks decline in value)... you limit your losses - if any - within a set percentage or dollar range that you have pre-determined, and are comfortable with!

    Example # 2: As the bid price for the stock moves up, the activation price (for the sell order) trails the new, higher value. Using my "$10 buy / $15 current" stock price example above, if the stock were to move from $15/share to $20/share over a period, the trailing stop sell order will trail the increased price over that same period, e.g. becoming 3% of $20 (or about $0.60/share). This means that if the $20/share stock were to lose about $0.60/share in value - having fallen from it's bid price of $20/share - the trailing stop order will be activated, becoming a market order.

    Example # 3: But stocks also go down in value. So, conversely, if you had bought the stock at $10/share and this stock is currently trading at $8/share, you could enter e.g. the same 3% trailing stop sell order to mitigate your risk of losing more of your investment. If the bid price for the $8/share stock then declined by about $0.25, it would trigger the sell and your position will be closed at around $7.75/share, limiting potential further financial loss.

    Why should we use a trailing stop sell order?

    Firstly, to help manage and control your investor emotion! Secondly, for long positions (where you intend to own the shares for a while), this technology - provided by your online brokerage account (or broker) - will help maximize and protect your profit in rising markets, and limit your losses in falling markets… and everyone would like to achieve that, right?

    Above I'm discussing Trailing Stop Sell Orders, but the same functionality can also be used for buy orders. When selling short stock positions (when an investor expects the stock price to go down) a Trailing Stop Buy Order can help protect profit in falling markets and limit loss in a rising market.

    An illustration, courtesy TD Ameritrade:

    (click to enlarge)

    Be sure to explore and become familiar with these (and other) technology tools that are often available at no cost to investors… tools that will assist you in managing your investor emotion, and help you in your quest to achieve a maximum return on your investments!

    Best of success with your investment decisions!

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Aug 14 11:41 PM | Link | Comment!
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